What is Volatility?

What Volatility Means for Retirement

Checking your retirement account during a market downturn can be stressful. It's not uncommon to feel the urge to make changes to your retirement plan during these times, but how you respond to market volatility can impact your long-term financial well-being.

For younger investors, market dips can be a chance to buy more investments at a lower price, as there's plenty of time for recovery. For those in or nearing retirement, these fluctuations can be worrying, affecting savings that could be used for daily expenses or future goals. 

Volatility isn’t random. It’s often tied to real-world events that create uncertainty and directly impact your retirement planning:  

1. Economic Indicators and Market Timing: Reports on inflation, jobs, and economic growth give us clues about how the economy is doing. If these indicators trigger a market drop just before or right after you retire, you might need to adjust your plans or budget.

2. Geopolitical Events and Withdrawal Concerns: Big events like wars, elections, or trade tensions can shake up the market. During these periods, withdrawing from your accounts can potentially drain your savings faster than expected, as you may end up selling assets at lower prices.

3. Interest Rate and Investment Choices: Central banks, like the Federal Reserve, tweak interest rates to control inflation and keep the economy steady. These changes affect how your retirement savings may need to be invested. Stocks become more volatile during rate changes, while bonds, though generally more stable, react differently to interest rate environments.

4. Corporate Earnings and Portfolio Balance: When companies beat or miss earnings expectations, it can cause big changes in stock prices. This is why diversification through vehicles like ETFs becomes crucial for retirees, offering a balanced way to navigate these fluctuations.

5. Global Events and Long-Term Planning: Major events like natural disasters or pandemics (like COVID-19) can mess with markets and supply chains. These disruptions might cause sudden market drops and can change long-term trends, which may require adjustments to retirement timelines. 

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Each of these types of volatility can spark fear or optimism, but don’t worry, market drops are normal and tend to recover over time. Since the 1920s, markets have often recovered within 3 months to 2 years, so volatility is not historically permanent.

Navigating Volatility in Retirement

While you can’t control the market, you can control your strategy. Here are a few tips on how to stay on track:

1. Contribute Consistently

If you’re still adding to your retirement accounts, market dips can be an opportunity. Contributing to your 401(k) or IRA when prices are down can potentially lead to better returns when the market eventually recovers. 

2. Keep an Emergency Fund

Experts often recommend keeping three to six months’ worth of living expenses in an emergency fund to avoid tapping into retirement savings during a market downturn, giving investments more time to potentially recover.

3. Adjust Your Withdrawal Strategy

The 4% rule is a withdrawal strategy recommended by many investors. It involves taking out 4% of your savings in the first year of retirement and adjusting that amount for inflation each year to help your money last around 30 years. If you need to access savings, strategies like this could potentially help maintain financial stability during shaky times.

4. Diversify Your Investments

A mix of investments like ETFs that include stocks and bonds can help reduce risk. Diversification spreads your money across different asset types, which can offer more balance when markets shift.

5. Consider Target-Date Funds

Target-date funds automatically shift your investments to be more conservative as your retirement gets closer. They’re an easy way to stay balanced and on track with your goals without having to worry about manually rebalancing all the time.

It can be tempting to "do something" when things look rough, but if your plan aligns with your goals, timeline, and risk tolerance, it may be wise to stick to it. Historically, investors who stay the course tend to come out ahead. After big declines, the market has often rebounded, sometimes strongly.

Stay on Track with PensionBee

While market ups and downs can feel stressful in retirement, with a solid plan and patience, you can stay on track for the future you’ve imagined. If you’re looking to simplify your retirement, PensionBee makes it easy to combine your old 401(k)s and IRAs into one simple account. Track your progress, keep saving, and get support from our friendly rollover managers, called BeeKeepers, every step of the way.